Grossly deceiving receipts: fraud found in GDR

The Securities and Exchange Board of India (SEBI) received alerts about large scale off-market transactions through its market monitoring system. On investigation, it was found that global depository receipts (GDRs) had been issued to sub-accounts of various foreign institutional investors by certain Indian listed companies. These GDRs were rapidly converted into underlying Indian equity shares of the issuing company and subsequently sold in large and synchronized deals to several buyers, including some stockbrokers registered in India.

Thus, a whole chain was formed – facilitation of the GDR issue, arranging for investors, and then providing an exit for these investors in the Indian markets through a further chain of known stockbrokers. The GDR issuance and disclosure standard was followed to effectively place the underlying securities in the hands of Indian investors without complying with the requirements for an issuance in the Indian market.

On the facts, the whole time member (WTM) of SEBI who heard the case held that all of the stages combined demonstrated “manipulation” or “fraud” on the part of each of the show cause noticees.

Suhail Nathani is a partner and Yogesh Chande is an associate partner at Economic Laws Practice. Malek-ul-Ashtar Shipchandler, a trainee, assisted with research. This article is intended for informational purposes and does not constitute a legal opinion or advice.